(Bloomberg) -- The dollar is entering a new period of strength fueled by Donald Trump’s plans to impose steep tariffs, currency strategists at Goldman Sachs Group Inc. say.
The world’s reserve currency has been rallying since late September. That’s put a dent in the bank’s long-held view that the currency would gradually slump from expensive highs.
“We no longer expect broad dollar depreciation,” a Goldman team led by Kamakshya Trivedi wrote in a note dated Friday. “The dollar will be stronger for longer.”
Goldman’s outlook has for the last two years predicted the US currency would retreat from lofty valuations. It was a forecast that proved prescient in 2023 but has most recently been thwarted this year by the dollar’s 2.4% climb since the Nov. 5 election.
“Our central view for the last few years was that we would see only ‘shallow’ dollar depreciation off the late-2022 peak, which largely proved true,” they wrote. “We now expect tariffs to feature prominently in the US policy mix next year, along with some further fiscal changes.”
Tariffs, alongside a booming economy and rising US asset prices are, “a potent combination for the dollar,” they added. The firm now expects Trump’s economic policies to increase the cost of US imports, while simultaneously lowering the cost of doing business domestically.
These boons should drive a trade-weighted index of the greenback up some 3% over the next year, Goldman forecast. As for the euro, that will decline to $1.03 over the next 12 months, they predicted, while the yen will weaken to 159 per dollar.
A Bloomberg gauge of the dollar capped its seventh-straight week of gains on Friday. It’s the currency’s longest run since February as traders continue to pile into long positions following Trump’s election in a bet on a stronger greenback and higher Treasury yields.
As upbeat as their view of the dollar appears, the strategists’ predictions still see it falling short of 2022’s heights. They also said they expect some pushback on their call considering the currency’s already high valuations and dovish outlook for the Federal Reserve.
As for other nations, Trivedi and team expect that a resilient dollar will pressure them to step in to support their own currencies, either through direct action in the foreign-exchange markets or by raising interest rates.
“We do expect that a strong dollar would catalyze fresh intervention in places, potentially be met with more restrictive monetary policy, and likely result in occasional FX volatility when US officials comment on the currency,” the strategists wrote.
It would not be a huge departure from the last two years, which saw the euro briefly slip below parity versus the greenback and Japanese authorities intervene to support the yen.
©2024 Bloomberg L.P.